Still hot for Sourcefire?

My security colleagues, writing on their Plausible Deniability blog, recently took a look at widening spread between Barracuda Networks’ unsolicited bid and Sourcefire’s current stock price. They noted that although Sourcefire shares briefly nosed above the $8.25 bid floated by privately held Barracuda, the shares have basically retreated back to the level they were before Dean Drako came calling in late May. Well, the spread turned into a gulf Monday, as Sourcefire stock dropped a buck to just $5.97, the lowest level since the unsolicited bid surfaced. For any arb out there, we would note that’s a 27% discount to Barracuda’s bid.

Lessons from a big Yahoo

Talk about being thrown straight into the shark tank (or more accurately a barracuda tank): John Burris has agreed to step from the board to the CEO spot at Sourcefire. The appointment comes just two weeks after Barracuda Networks made an unsolicited offer for the network security vendor. We noted that the low-ball bid of $7.50 per share from Barracuda – an aggressive company that lives up to its name – will likely set the ‘floor price’ for any sale of Sourcefire. (Since the bared-teeth bid was revealed, Sourcefire’s long-suffering shares have closed above the offer price in every trading session, finishing Wednesday at $7.92. The $0.42 difference equates to about a $10m gulf between what the market says Sourcefire is worth and what Barracuda says the company is worth.)

The fact that Sourcefire – which had been looking for a chief executive replacement since February – stayed in-house to fill the top spot makes us wonder if the company hasn’t resigned itself to a sale. Don’t forget that Sourcefire was supposed to be sold to Check Point Software Technologies more than two years ago – at a higher price than its current valuation, no less. And although we are far from experts in employment contracts, we saw nothing in Burris’ agreement that would make an acquisition of Sourcefire prohibitively expensive. Certainly nothing like the employee severance plan at Yahoo, which is effectively a poison pill.

Indeed, Burris may well look at the tenure of Yahoo’s Jerry Yang during Microsoft’s unsolicited approach to the search engine as a quick executive lesson in how not to handle M&A. On the no-no list: refusing to talk to a suitor, erecting all sorts of obstacles to consolidation and, above all, continuing to insist that you know best in creating value at a company – even when all evidence points to the contrary. “I bleed purple,” Yang said at one point, using Yahoo’s signature color to demonstrate his closeness to the company he helped found. Yang may see it that way, but Carl Icahn and other Yahoo shareholders don’t particularly care. They’re very clear that blood is red, just as money is green. We think Burris – whose connection to Sourcefire only dates back to March and who previously headed up sales at Citrix Systems – won’t suffer a similar case of color blindness.

Barracuda bares its teeth

Never known as a shy or retiring competitor, Barracuda Networks has lobbed an unsolicited bid to acquire Sourcefire for $7.50 per share in cash. (Full report.) That works out to a slight 13% premium on Sourcefire’s closing price ahead of the bid, and essentially where the shares began 2008.

We look at Barracuda’s bid as setting a ‘floor price’ for Sourcefire. It is certainly an opportunistic offer, as Sourcefire has been burned on Wall Street. (The company didn’t help itself when it came up short of investors’ expectations in its first quarter as a public company a year ago.) To get this deal closed, however, we suspect Barracuda will have to raise its bid. Investors have already pushed Sourcefire shares above the offer price.

To push this deal along, Barracuda can draw on the experience of one of its two outside backers, Francisco Partners. The buyout shop took IT security appliance vendor WatchGuard Technologies private in July 2006 after a protracted and bitter campaign.